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Saturday, May 8, 2010

Was I Dreaming, or Did the Dow Drop a Grand When I Blinked on Thursday?

Again, it's been a while since I've posted. This endless bear market rally with near-zero volatility and low volume has been mesmerizing. Yet, I've maintained a skeptical attitude and about five months ago began buying puts on the S&P500 at 1100. It's taken much longer than expected but perhaps the action this past week is saying the accounting-rule-change-driven relief rally top is finally history.

The 998 point intra-day drop in the Dow over a few minutes, Thursday, is already beginning to fade from public memory ("...move on folks, nuthin' to see, nuthin' to see. Don't try connecting the dots. Nuthin' to with Greece, debt, or anything fundamental. Just a wee omputer-trading glitch.").

Instead of focusing on that singular event, I'm posting another big picture piece on the excessively indebted US and world economic systems. It might appear that I post nothing but bad news, but keep in mind that you receive little but good news from the mainstream media, and my intent is to present information that properly rounds out the picture.

The biggest economic problems in the world today are: debt, debt, and debt. Understand that, and you can begin to understand something of “modern” economics. However, to fully understand the terrible state of the economy today, you also need to understand how the source of practically all money is debt, in the form of bank credit, and the simple facts that we are all made prisoners of this monetary system by the legal tender law and the non-existence of alternative money.

It is not my intent to explain the mechanics of that system here. Suffice it to say that as long as you operate within the system, you being robbed directly by inflation and also by taxation on illusory inflation-profits, and the markets you try to “invest” in to protect your savings and generate real profits over and above inflation are being manipulated and gamed by the big financial players. Even your federal, state, and local governments are being manipulated and gamed by these same players.

The end game comes when the public and governments can absorb no more credit. The mathematics of repayment of principle plus interest then dictate that there shall be outright individual, business, and government failures. This is not even a zero sum game. The mathematics dictates that there shall not just be relative winners and losers, but there shall be failures, bankruptcies, and abject poverty.

These results are not an absolutely necessary part of the human condition but they are absolutely a result of the present less-than-zero-sum monetary system. What would you think of parents having four children and telling them there is enough food for all, but they plan to starve one child to death just to make life a bit more competitive? It's an admittedly gross and imperfect analogy but it's something like that.

Let's survey the past two and a half months to see how this 400-year-old mature monetary system is working out. If at the end of your reading, you still think that you can “play the markets” in stocks or bonds, without understanding banking, credit, and debt, well, good luck. You will need an abundance of it.